There is a reason why prospective parents are urged to save money before having children. Costs associated with child care can be excessive, and they appear to increase over time.
Care.com reports that roughly 67% of parents spend 20% or more of their monthly income on child care. And on a national scale, the average weekly cost of daycare is $284 per child. This is a 53% increase from 10 years ago, when the average weekly daycare cost was $186.
You may be able to reduce your child care expenses by taking advantage of tax deductions.
When You Receive a Tax Deduction for Child Care
The ability to reduce your taxes is enormous because it could place a substantial amount of money back in your pocket. Hence, it is advantageous to determine whether your employer provides a dependent care FSA.
Numerous individuals are acquainted with FSAs, or flexible spending accounts, in relation to healthcare expenses.
However, there is a dependent care version which enables you to save up to $5,000 annually for child care expenditures if you are single or married filing jointly. If you are married but file a separate tax return, your dependent care FSA contribution limit is $2,000.
If you are paying approximately $284 per week, you ought to have no trouble paying off a $5,000 balance within a year.
Remember that this $5,000 amount is per household and not per child. If you are married and filing jointly with three children, you have the same $5,000 limit as a single-child household.
Dependent Care FSA
A dependent care FSA will not reduce child care costs. But you can finance one of these accounts before taxes to shield a portion of your income from the Internal Revenue Service.
Let’s say you contributed $5,000 to a dependent care FSA this year and your tax bracket is 22% based on your income. Your FSA will help you save $1,100.
Usually, you fund a dependent care FSA before the new year. If you missed enrolling in a 2023 FSA but had a child this year, you can join now with the qualifying life event. Contact your benefits department for info.